Buying Buy to Let Property

A buy to let is when a property is purchased explicitly for the intention of renting it out. They are an investment that can come with many profits in the long run and allow you to boost your monthly income. 

You must always make sure that the rental return you are making covers your expenses. These typically include the cost of the mortgage, repairs, letting agent’s fees or insurance. There are plenty of things to consider before deciding to make the investment.

Like with any long term financial commitments, it’s always best to gather some advice to understand the ways of managing your investments. But how is investing in buy to lets beneficial?

• Buy to Let Mortgages
• Deposit and Costs
• Tax Increase
• HMO Properties
• Multi-Lets
• What are the pros and cons of investing in a buy-to-let property?
• Buy to Let Secured Loan
• Commercial Buy-to-Let Mortgages
• Bridging Buy to Let Properties
• Buying Buy to Let Property through a Limited Company
• Speak to a professional

Buy to Let Mortgages

Getting a mortgage for buy to let is your usual option, unless you are a cash buyer. This is because a standard residential mortgage is for people who intend to live in the property, and not rent out.

The amount you may be entitled to borrow highly depends on the rental income you are expecting from your potential tenants. Although, in a lot of circumstances, your lender may consider any other sources of income you receive. You need to be familiar with your lenders eligibility terms first. A broker can help you with this as it is very complex.

What are the pros and cons of investing in a buy to let property?

Pros:

• It’s an investment. The property values will go through a number of changes over some time. However, it could increase in the long term.
• It adds extra monthly income. The demand for rental properties has skyrocketed over the past few years. Studies have shown that more young adults are renting rather than buying. This is good news for landlords.
• However, the demand for properties to rent is at an all time high, since the prices of housing have also skyrocketed in the last few years. This makes it easier and quicker to find tenants to rent out to.
• Private landlords can take out insurance that helps them cover against damage, rental income or legal costs.

Cons:

• It is pretty risky. Of course, all types of investments involve taking a risk. However, with a buy to let, there is always the risk of an empty property. This means landlords have to be prepared that there’s not always going to be a tenant living in their property, causing gaps in monthly income between tenants.
• Higher fees should be considered when investing into a buy to let. There are certain costs that landlords are required to pay when purchasing a BTL property. These could include insurance fees, council tax, Stamp Duty, ground rent, property repairs and maintenance costs. Stamp Duty was introduced by the government in April 2016, which requires a 3% surcharge for any additional properties purchased.
• It’s a huge responsibility. Renting out a property means the landlord is responsible for maintaining and managing their tenants’ problems in the property. This could include issues like maintenance or repairs which are under the landlord’s full responsibility to fix.

Do’s and Don’ts

Do a lot of research. Whether it’s about the local market or finding your best deals – you need to find out if buying property for the intention of renting it out is really for you.

Do think about renovating your property in a modern, attractive way. You are much more likely to attract tenants if your property is decorated to a high standard.

Do get advice from an adviser regarding which property to choose and how you should calculate your sums in order to check your affordability. Remember this is a huge investment.

Do consider whether you wish to buy the property personally or in a limited company. Talk to a mortgage expert and your tax adviser as the right choice will depend on your strategy – check out our videos and pages on this subject

Don’t purchase homes that are old and need a lot of work unless the works required are profitable and you have budgeted for them. The more maintenance your property needs, the more money you will need to invest in the property.

Don’t rush or cut corners when it comes to legal documentation. All of this needs to be filled out and discussed with your tenants before you allow them to rent your property. Which leads to the final step:

Don’t skip background checks. Always check your renter’s affordability, if they have ever been evicted or any legal requirements. Make sure they are familiar with and sign all the tenancy agreements.

Buying Buy to Let Property Through a Limited Company

This option is becoming more and more popular due to the changes to the tax relief. This has led to a higher demand for investing in property through a company as you could pay less tax. It may be more beneficial than investing as a private landlord for multiple reasons. Such as paying corporation tax instead of income tax, or not having to pay for rental income.

Tax on properties owned by limited companies is different to owning privately. It’s much more flexible. The entire mortgage interest payment is tax deductible, reducing the amount of profit to be declared. This causes the amount of tax due to decrease. Additionally, instead of paying income tax at the normal rate, you then pay corporation tax on the profits. 

What are the pros and cons of purchasing a buy to let property through a limited company?

Pros:

• Multiple tax benefits. Purchasing a buy to let property as a limited company means you could be paying less tax. This is due to the fact that rental income for a limited company is viewed as corporation tax rather than income tax or personal allowance.
• Owning a rental property through your company could entitle you to claim back certain expenses. This is because some expenses such as mortgage interest rates are seen as business expenses for limited companies. 
• Owning buy to lets as a company also protects your assets. If anything goes wrong with your new property investment or business, your personal finances are protected. This is because limited companies provide limited liability.

Cons:

• Extra costs. Although you have many more tax benefits buying through a company, it is crucial to know that you might still face some additional fees. These can be corporation tax, legal fees etc.
• Whilst limited companies are able to take out mortgages the same way an individual can, you could find that a big number of lenders may charge you higher interest rates. Banks and lenders see lending money to companies as a much bigger risk than lending to an individual, because of the limited liability privilege. 
• No capital gains tax allowance. This is only given to individuals who sell a buy to let property before they have to pay the capital gains tax. This option does not apply to limited companies.

Speak to a professional 

Landlords should make themselves aware of the pros and cons and the requirements that come with investing in a buy to let mortgage.

It might be a good idea to seek some professional advice from a tax adviser (not necessarily your accountant) beforehand.

Whatever you choose to do, it all comes down to tax planning and assessing the mortgage market. It’s advised to speak to both a financial expert and a tax advisor. They can guide you through all the most important information carefully and explain the options available to you. 

Deposit and costs

Most of the time, lenders will expect your rental income from said mortgage to be between 25% and 45% higher than your mortgage payments.

Also, with a buy to let property, you will be expected to provide a much higher deposit – 20% upwards is the norm. Unfortunately, buy to let mortgages also tend to have higher interest rates than residential mortgages.

Another thing to keep in mind, is that it may be a lot harder for first time buyers to purchase a buy to let mortgage. Lenders will usually see first time buyers as a bigger risk as they lack experience. You may be required to pay a much bigger deposit and the number of properties available to you will be limited.

You also have to consider extra costs such as legal fees, your lenders product fee and insurance.

Again, a broker will know very quickly from speaking to you, which lenders might suitable for you and the costs they charge.

Tax Increase

For landlords, using a personal buy to let mortgage is the most straightforward way of building a small portfolio. With that being said, due to the recent changes of tax relief, it’s been a lot tougher for private landlords. 

The changes were fully put into place in April 2020. These changes meant that landlords who invest into buy to let properties, can no longer deduct any of their mortgage expenses from the rental income to reduce their tax bills.

Tax relief has decreased over the past couple of years, causing a knock-on impact to basic rate taxpayers. These changes have caused the basic rate taxpayer to go up the bracket because they can no longer deduct the interest accumulated from the amount they earn to reduce their profits. 

Is this bad news for landlords?

Being a private landlord used to be a lot more beneficial due to the advantages of significant tax relief. Before the changes introduced in 2017, being a private landlord with a mortgage on your property meant that any interest you paid towards the mortgage payments, was deducted from the rental income before you paid tax on it. 

The changes were gradually phased in within each tax year since 2017 and are now fully in tact.

Unfortunately, the new rules mean that some landlords have to pay more on their rental income. As a result, the higher rate taxpayers can no longer claim for their tax refund on their mortgage repayments. The new system allows a 20% tax credit, rather than the top rate which used to be at 40%.

The new rules have put some landlords into different tax brackets. This is because they must declare the income that has been used to pay the mortgage on the tax return. This could place the total income of the landlord into the higher or additional rate tax bracket. It depends on their salary or any other source of income.

Some landlords who make a smaller profit may actually find that they are in the red after tax. This is bad news, because it can mean paying tax when you have actually made a loss after tax

HMO Properties

You may wish to rent out to more than one tenant. A property with more than three tenants from different households, all separately paying rent is considered a HMO (House in Multiple Occupation).

HMOs are usually cheaper when it comes to paying rates and fees. They are also much easier to get, since the criteria is less strict.

With that being said, of course a HMO has it’s separate costs and requirements. For example, tenants will usually only pay for their rooms and share facilities such as the kitchen, lounge and/or bathroom. This means that a lot of the time, the property is all bills included and fully furnished, ready for the tenants to move in immediately. It also means that that upfront cost of preparing the property for tenants to move in will be higher.

A HMO property can be anything from shared housing to a hostel or a private halls residence.

Multi-Lets

Similar to a HMO, multi-lets are for renting out to multiple tenants who live in one property. The difference here is that multi-lets have a smaller number of people living in them. They are usually standard family homes with a few extra rooms that can be separately let out. Whereas HMOs are made to inhabit more people. Any multi-let with more than 5 tenants living in it is classed as a HMO.

Multi-let mortgages can be a bigger investment since you will usually purchase a house and convert it to make more bedrooms. Of course, this requires more savings, and again, just like a HMO, it is typically rented out with all bills included, fully furnished and ready for tenants to move in.

They are better than renting out to a sole tenant as both multi-lets and HMOs bring in a bigger rental profit in the long run. However the is more hassle to consider due to the number of tenants and the fact they may turn over faster

Buy to Let Secured Loan

A buy to let secured loan, also known as a buy to let second charge mortgage, is a loan secured against the equity you have in your buy to let property. However it sits on top of your mortgage and is separate to the mortgage; usually with a different lender.

The advantage is you will be offered different terms to those from your mortgage lender which can often help you raise more cash. And you don’t need to remortgage which can sometimes save money.

Since this type of loan is quite versatile, you may wish to use it to raise cash on a property you already own to purchase another buy to let property, refurbish or use it for a deposit. There are also some excellent second charge buy to let loans which work much like an overdraft. This provides a pot of cash landlords can dip in to and only pay interest on the money being used. It is great for deposits, refurbishments and is faster and cheaper than bridging finance. Secured loans for buy to lets are much easier to get accepted for even if you have poor credit. They are usually a lot easier and faster to process, which can be really helpful if you need quick finance.

More flexible eligibility criteria

Eligibility for buy to let secured loans is judged differently to a standard mortgage as the criteria and lender is usually different. The lender will usually check the equity you have in your property. Basic background and affordability checks will also then be carried out just like a mortgage. The main difference is that the underwriting is often more relaxed so you can get a secured loan where perhaps a first mortgage lender wouldn’t lend. Of course, like with your standard mortgage, you are risking losing your assets if you fail to make the repayments.

Commercial Buy to Let Mortgages

Similar to a standard buy to let mortgage, a commercial buy to let mortgage is usually used for purchasing or re-mortgaging a number of properties or a property with multiple tenants.

There is an overlap with HMO and multi let mortgages but different lenders may be available.

Consequently it’s important to use a broker who is experienced in commercial mortgages as well as just buy to let mortgages. Most mortgage brokers don’t have the relationships with commercial mortgage lenders as it is a separate discipline.

Bridging Buy to Let Properties

Many landlords and property investors use bridging loans as part of the acquisition process. This could be because the property needs renovating before it can be let or because there is a short term cash flow issue.

It’s usually much easier and quicker to arrange a bridging loan rather than a mortgage, and it can allow you to borrow a similar amount. This option allows you to move faster on opportunities and therefore allows you to secure your desired property.

However, often with bridging loans, borrowers don’t make monthly interest payments as they don’t have the cash flow to do so. Instead the interest can be deducted from the loan so in effect the payment of interest is calculated at the end when the bridging loan is paid off

There are many pros and cons of a bridge to let loan

• You can get approved within 24-48 hours depending on the proof you provide needed for background checks
• You may borrow larger sums
• Available on any most property types
• Short term
• More expensive than traditional mortgages
• You need to be sure how you will exit the bridge – normally sale of a property or remortgage

Rates available are important but as this is short term money, often needed quickly, you need to consider the fees and the speed in which the lender can complete in your circumstances. Having the right solicitor is also massively important. The average local solicitor doesn’t understand bridging and they are far too slow. Use a specialist solicitor. Again, it’s advised to speak to an adviser, so they can guide you to the right lender and manage the process.

Talk to a Promise Money adviser for more details

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